CFA Level ICorporate IssuersMedium
A manufacturing firm reports the following operating figures: days of inventory on hand = 60 days, days of sales outstanding = 45 days, and days of payables outstanding = 30 days. What is the firm's cash conversion cycle?
- A135 days
- B105 days
- C15 days
- D75 days
Show answer & explanationAnswer & explanation
Correct answer: D. 75 days
Cash conversion cycle = DIO + DSO − DPO = 60 + 45 − 30 = 75 days.
Why the other options are wrong
- A. Simply sums all three figures without subtracting payables.
- B. Adds DPO instead of subtracting it.
- C. Results from subtracting DIO instead of adding it.
Cash Conversion Cycle (CCC)
The number of days a company takes to convert its investments in inventory and other resources into cash flows from sales, net of payment period to suppliers.
- CCC = DIO + DSO − DPO
- Shorter CCC generally indicates more efficient working capital management
- A negative CCC means the firm collects cash before paying suppliers
Memory trick: Inventory in, Sales out, minus Payables held gives the Cycle